Fed Governor Raskin Says Bank Reputations Harmed by Bailouts

Federal Reserve Governor Sarah Bloom Raskin said banking supervisors need to pay more attention to risks that affect the reputations of U.S. banks because Americans’ anger hasn’t diminished over government bailouts, subprime mortgages and foreclosures, falling home prices and job losses.

“To large swaths of the American public who have experienced the devastation, the causes rest squarely on the shoulders of financial institutions, especially the largest institutions,” Raskin said today to bankers and regulators at a speech in Atlanta. “Those taxpayers are still unhappy about such a massive government intervention that seemed to aid banks that were not held to account, while distressed households were left to pay the price.”

Raskin, a former state bank regulator, said bank directors, managements and supervisors need to pay greater attention to how banks (S5BANKX) are managing their reputations with the public. Banks may have trouble introducing fee-generating products or lose deposits when they suffer from poor images, she said.

“Even as the economy comes back to life, our memory of these events is still sharp and the reputational damage suffered by U.S. financial institutions during the crisis endures,” Raskin said at the Atlanta Fed’s banking-outlook conference. “Unfortunately, in the public’s view, little has happened to restore their trust and confidence in financial institutions.”

Bernanke Comments

Fed Chairman Ben S. Bernanke said this week he wants to end investor perceptions that the largest U.S. financial institutions will be given taxpayer bailouts to prevent a collapse. The Fed is among the regulators implementing the Dodd- Frank law, the most comprehensive rewriting of financial regulation since the 1930s, which has subjected the largest banks to more scrutiny and higher capital requirements.

In response to a question, Raskin said there are implications for banks’ reputations raised by a Bloomberg View article estimating that the largest U.S. banks receive an implicit taxpayer subsidy amounting to $83 billion a year. The article said the subsidy arises because banks’ funding costs are lowered by the perception they won’t be allowed to fail.

“I think the reputational elements are something that is embedded there,” she said. If the public perceives that there is a taxpayer subsidy, then “that is a problem.”

“That is a source of financial instability any good regulator is going to want to focus on,” she said. “It feeds directly into the too-big-to-fail debate.”

Reputational Risk

In her speech, Raskin said examining how bank operations can influence their reputations needs to be part of a regulatory overhaul.

“If we were better able to identify and monitor such free- floating risk, and in so doing, to push bank boards of directors and senior management to pay more attention to reputational risk, we could help reduce the underpricing of these risks,” she said.

Raskin didn’t comment on the U.S. economic outlook or monetary policy in her prepared remarks.

Raskin, 51, was appointed to the Fed’s Board of Governors by President Barack Obama in 2010. She previously served as commissioner of banking regulation for the state of Maryland.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net;

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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